Domestic context: the current NHS Payment Scheme

NHS payment mechanisms have evolved significantly over the past 20 years in England, due to wide ranging reforms as well as incremental adjustments. Historically, before those 20 years of reforms, block contracts were used to commission community and mental health services. Primary care is funded through a mix of capitation payments and quality incentives. Payment by results (PbR, also known as payment by activity or activity-based payment) was implemented in the early 2000s in the acute sector to tackle long waits for elective care. In this case (and ever since), ‘results’ have been defined by the volume of activity, not health outcomes. Over time, the payment system evolved, moving towards a blended system that was upended by emergency arrangements during the COVID-19 pandemic. 

Today, NHS England sets out payment rules in the NHS Payment Scheme, a statutory requirement of the Health and Care Act 2022, specifying payment mechanisms and payment prices. ⁱⁱⁱ  For payment mechanisms, the current NHS Payment Scheme for 2023–25 requires: 

• aligned payment and incentives (API, a type of blended payment) for contracting healthcare services over £0.5 million delivered by NHS trusts and foundations trusts
• low volume activity block payments for services less than £0.5 million delivered by NHS trusts and foundations trusts
• activity-based payments for services delivered by other providers for which national unit prices (tariffs) are set
• local payment arrangements for services delivered by other providers where no national unit price exists. [43]

Crucially, within API payments, the scheme specifies (a) activity-based payments for elective care delivered by secondary care providers and (b) fixed block payments for community providers and non-elective activity delivered by secondary providers. 

The 2023-25 payment scheme does permit that alternative local payment arrangements can also be made for services delivered by NHS trusts and foundation trusts with approval from NHS England. 

The present scheme – specifically the two components within API – has been designed to align with the Elective Recovery Fund (ERF), with payment by activity incentivising higher volumes of elective care activity from NHS secondary care providers and independent providers to reduce the elective care backlog. 

As set out below, while this may incentivise a higher volume of elective activity to help address the elective care backlog (although evidence is mixed and there are system, workforce and infrastructure constraints), it primarily incentivises more expensive, downstream interventions, accelerating an ever-increasing share of the NHS budget going to the acute sector rather than the more preventative interventions ICSs have been established to achieve. New payment mechanisms may better enable the delivery of ICSs’ wider goals.